According to a report from the Bank of England (BoE), the FLS scheme, reduced lender’s funding costs by around 70 basis points and led to a decrease in marginal costs of 20 per cent. Overall, the FLS helped to boost gross lending by more than 30 per cent.
The scheme was introduced in 2012 to encourage building societies and banks to expand their lending by offering cheap medium-term loans to UK lenders.
This resulted in lenders reducing interest rates by around 40 basis points to attract borrowers, but on the flip side fees were increased by around £120 in an effort to recoup profits.
The BoE said the decline in interest rates and rise in origination fees helped lenders to segment the market and price discriminate, and consequently allowed them to “extract consumer surplus and increase profits”.
The introduction of the FLS partially led to the gap between no-fee products and positive fee products to widen, with the difference in rates between the two going from an average of 10 basis points in the first quarter of 2012 to an average of 40 basis points in the first quarter of 2014, and then 50 basis points by the first quarter of 2015.
On the other hand, the report said positive fees were “stable” before the FLS programme but rose by around £100 afterwards.
Focus on rates
The report said borrowers seemed to be more sensitive to interest rates than to origination fees, especially among lower-income households with a younger head.
The BoE said 51 percent of borrowers selected a mortgage that lowered their borrowing costs over the fixation period even when an identical product was available, and 43 per cent choose a lower interest rate and higher fee when the reverse would have minimised their borrowing costs.
According to the analysis, six percent of borrowers chose a product with a higher interest rate and lower fee when a product with the reverse would have lowered their borrowing costs.
“The asymmetry in borrowers’ non-cost-minimising choices in favour of mortgages with lower rates and higher fees suggests that interest rates may account more than fees for borrowers’ choices,” it explained.
It added that origination fees were an “important component” of the total cost of borrowing and profit of lenders, partially due to frequent refinancing in the UK which means borrowers pay them frequently.
The report sought to assess the link between monetary policy and its effect on mortgage pricing.
Overall, the BoE said that the “pervasiveness of products with multiple rate-fee pairs suggests that lenders are actively seeking to price discriminate across borrowers using two-part pricing”.